Is HMRC handing the low-paid pension saver a Pyrrhic victory?


An administrative matter that impacts 1.7m low paid people in the UK (mainly women)

The government has today published a ‘call for evidence’ on how to address the different outcomes for lower earners, depending on whether their pension schemes use the relief at source (RAS) or net pay method of tax relief.

The call for evidence seeks views from a wide range of stakeholders on how the two systems could be aligned. You can find more information on this call for evidence, including how you can submit a response at Pensions tax relief administration: call for evidence – GOV.UK

No solution has yet been found..

In his foreword  to the call for evidence, Treasury Minister John Glen says that

To date, a straightforward and proportionate solution has not been identified

this is the Treasury line and they stick to it in the introduction to the paper

To date a proportionate and straightforward solution to address the difference in
treatment for low earning pension savers has not been found.

The net pay action group , powered by CIOT’s Low Income Tax Group and Chaired by Baroness Ros Altmann has had several discussions with the Treasury and believes that a solution has been found.

My reading is that the Treasury has only accepted something has to be done about low-earners pension contributions at a time when pension tax relief is generally under scrutiny. As reported last week , now is that time.

I remember being told by a former head of pensions strategy within the DWP that the Treasury would only act on the net pay problem as part of a wider review and she is being proved right.

The problem

There are two main ways for individuals to receive income tax relief when
saving some of their earnings into a pension. These are either:

• net pay arrangements – an individual receives tax relief when pension
contributions are taken out of their pay by their employer before tax is
calculated, or

• relief at source – a pension scheme claims tax relief at the relevant basic
rate from HM Revenue & Customs (HMRC) because individuals make
pension contributions out of their earnings after tax has been calculated.
Individuals who pay tax at rates higher than the basic rate can claim any
extra relief directly from HMRC

It should be noted that the relief at source method is currently saving the Treasury a large amount in unclaimed higher rate tax-relief, principally from higher rate tax payers not using self- assessment. For a Treasury looking to minimize the opportunity cost of pension tax-relief , there is an inherent bias in the relief at source way.

Relief at source grants an incentive to save even to non-taxpayers by crediting all pension savers with the equivalent of basic rate tax, saving non-taxpayers 25% of the cost of contribution.

The problem is very simple, the non taxpaying saver using net pay, does not get the incentive and has to pay 100% of their contribution . the system is penalizing an estimated 1.7m pension savers who are over-paying pension contributions by a quarter.


Government seem to have narrowed down the options to solve the problem to four

  1. Pay a bonus to low earners to the extent they have overpaid under net pay; the Government appears to be dismissing this option as “too hard”, something that the net pay action group disputes. We believe it is the best way forward
  2. Take relief back from low earners; this is not likely to get much favour from groups representing low-earners and is certainly not in the spirit of incentivising all to save (we have a pensions minister who is also the minister for financial inclusion)
  3. Employers operate split schemes . Only (as far as I know) Tesco do this, they contribute to two master trusts, one is net pay and one is RAS and they allocate people to the appropriate master trust based on an estimate of their earnings. As I have written before , this is unlikely to get universal adoption though hats off to Tesco.

these diagrams taken from the consultation show that net pay and RAS systems are quite different and RAS is considerably more complicated

net pay

how net pay works


net pay 2

How RAS works

4. Require all schemes to move to RAS. This appears to be the preferred solution and it puts the blame firmly on occupational schemes choosing net pay , who will have to quite change the way they operate. I have been very critical of occupational pensions for their complacency over net pay but I don’t think we should cast them as the villain of the piece. Schemes such as NOW and Smart and Llloyds and Whitbread which are all working on net-pay cannot move to RAS using existing administrative systems.

Though some might move more easily than others , we should remember that there are around 42,000 other occupational schemes , most of which operate under RAS and a move to get all of them to move to RAS would break many a camel’s back. They have enough to do complying with the Pension Schemes Bill’s proposed requirements on them to supply data to the pensions dashboard.

HMRC’s analysis –  a little disappointing

Frankly , the call for evidence’s analysis of the solutions seems biased towards solutions that cause HMRC least pain – especially the movement of occupational schemes either to split arrangements or entirely to net pay.

The paper seems to ignore the fact that a huge number of those missing out under net pay arrangements are making contributions to DB arrangements (mainly to Government schemes).

The arguments put forward against the bonus , seem mainly based on HMRC having to implement new processes and perhaps a new system

A new payment system would be required to pay the bonus. Adjusting
the tax code would not work as it would result in further personal
allowances, which would remain unused. As the bonus would be payable
to those who are not paying tax, it would not be a repayment of tax, nor
a repayable tax credit either. Therefore, current systems could not be
used to pay the bonuses

Our understanding is that the cost of doing this would not be huge. I suspect that HMRC are putting up a smokescreen , giving itself time to spin this out till a wider consultation on tax leads to a tax system where this is taken care of. That wider change is likely to have much more brutal implications than this administrative call for evidence considers.

So my view is that though this call for evidence is important and welcome, it may ultimately be swamped by a tsunami  of change that is brewing up deep beneath the ocean of the pandemic.

The net pay action group has done a great job getting this matter this far and it may well be that this call for evidence will lead  to unliateral change. Even if it does not , NPAG’s actions have advanced the debate on tax equality.   This may be the larger legacy of the work it has done so far.


Final words…

this just in from one of  my favorite payroll people

Is it me or is it a bit bonkers to say that it would be difficult to offer net pay arrangement folk a bonus, but it would be so much easier/cheaper  to

  • change all the legislation in respect to the public service schemes, and
  • move all of those hundreds of thousands of people to a RAS model, and
  • require the schemes to segment the Scottish from rUK taxpayers, and
  • make tax relief scheme returns to HMRC, and
  • then HMRC fund the schemes with the tax relief, and
  • have more people in SA to make higher rate tax relief claims

and that’s not even thinking about the impact on the private sector who’ve got quite a lot of other stuff on their plate at the moment just trying to survive…

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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